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Isle of Capri's Full House

The casino operator has a hot hand. Will it last?

Much like the hot dice at a crowded craps table on a Saturday night, Isle of Capri's (NASDAQ:ISLE) strong earnings results caused a stir as market players bid up the stock to get in on the action. Can we count on Isle of Capri to keep its hot hand?

Isle is currently looking like a natural to some investors. Quarterly results clearly impressed; revenue for its fourth quarter, ended April 30, jumped 19%, while earnings climbed by much more. Full-year revenue growth was OK, up just a little more than 4%, while earnings grew by almost 6%. Results were a bit skewed, however, in part by some other casinos that are just getting back to normal after having been hit by major hurricanes last fall. In addition, a couple of casino properties are being segregated from continuing earnings, since they're being sold. But overall, analysts applauded new property development and are upbeat about the growth potential.

The biggest drawback to Isle is its substantial debt load. Casinos are more capital-intensive than the average business is (and thus require higher levels of debt), but Isle's historical debt-to-cap of more than 80% stands higher than those of its peers. Since the gambling industry is highly cyclical, any major downturn could knock Isle down for the count. As a case in point, you can see from the income statement that interest expense eats up more than half of operating income.

That being said, Isle does generate a substantial amount of operating cash flow, usually well in excess of reported earnings. Most of it is used in capital expenditures to build and update casinos, but it appears to be sufficient in paying debt costs. That is comforting, but I can't find a compelling reason why one could estimate that the stock is trading at a discount to its intrinsic value. New properties could add future cash flow, but because of a lack of a consistent track record of successful growth, it's hard to tell.

Singer Kenny Rogers once sang that in poker, you have to know when to hold 'em and know when to fold 'em. The same catchy philosophy can also be applied to investing. In regard to Isle of Capri's stock, there's no need to run. But unless you're a high roller, it might be best to walk away from the action for the time being. Still, don't despair -- there are other considerations for your bankroll.

Gambling is cyclical, but the business appeal is substantial, with casinos throwing off tons of cash. For any industry, it's always a good idea to check out the leaders in the industry. In gaming, that includes Harrah's(NYSE:HET) and MGM Mirage(NYSE:MGM), which together own a good portion of casinos at the gambling Mecca that is the Las Vegas Strip. You also might want to consider suppliers that win regardless of which casino does, including International Gaming Technology(NYSE:IGT) or Shuffle Master(NASDAQ:SHFL). Here's hoping Lady Luck is on your side.

Fool contributor Ryan Fuhrmann is long shares of IGT but has no financial interest in any other company mentioned. The Fool has an ironclad disclosure policy. Feel free to email him with feedback or to discuss any companies mentioned further.